Will Italy Re-Denominate Back Into Lire?

We have discussed this a few times over the last year and as Greece begins to show signs of defection, it is perhaps worth considering what a spoiled and chided sovereign might do in a temper tantrum. Peter Tchir, of TF Market Advisors, puts it best this morning: "Everything I have read over the past couple of weeks coming out of Italy, tells me that if there was one country prepared to "screw" the Euro and go it alone, it would be Italy. They don't like Merkozy treating them like children, and they have a big enough economy that a dirt cheap Lire would make exports possible".

Italian 5 year bond yields hit 6.24% that is 37 bps higher on the day. The spread to bunds moved 56 bps. 10 year Italy "only" yields 6.32% - that is getting scary flat. The front end isn't as flat, but 2 year Italian yields spiked to 5.5% (55 bps on the day).

If Thursday didn't teach us that you can't let price action tell you whether a "grand plan" is good or not, I would watch this very carefully. Yield curve flattening is a big deal and a critical step in the deterioration of the credit worthiness of an entity (the 1st loss from the EFSF may be gaining in value, but who wants the more and more likely 2nd loss?).

I once again would be concerned about getting too short Italy via CDS. It looks like Italy could re-denominate the debt (as a G-8 country) back into Lire and it would NOT be a CDS Credit Event. It might be a lot of other things, but Credit Event is not one of them. Everything I have read over the past couple of weeks coming out of Italy, tells me that if there was one country prepared to "screw" the Euro and go it alone, it would be Italy. They don't like Merkozy treating them like children, and they have a big enough economy that a dirt cheap Lire would make exports possible, and while foreigner bond holders might lose on a forced convergence to Lire, Italian banks and pension funds could at least pretend they are getting paid in full. China did send delegates to Italy not so long ago, if I remember. Maybe it wasn't part of a save Europe project, as much as it was a what bargains can we find in Italy trip? A really strong Deutsche mark might not even both export oriented China as it would make German goods less competitive at the time China is trying to step up their manufacturing to a higher level of quality.

Germany may regret wasting the last 18 months trying to save the Euro and not doing enough to save themselves.

This scenario is clearly far fetched, but if we are going to think out of the box, not every possible outcome is good. And this would be good for Italy and China.

And people still can't figure out that any fiat is going to leave them screwed. Back up the truck, because that "eureka" moment is going to come soon in Euroland. And eventually Americans will understand it also.

Fiat? I don't even know what that is. I don't have time to learn, I have to set me DVR to watch Dancing with the Stars while I watch the E! miniseries about the Kardashian divorce and I almost forgot about tending my farmville crops on facebook.....

What were you saying?

The average American wouldn't understand the situation, or even care to understand even it if squatted over them and took a shit on their chest.

Italy doesn't have political majorities. It has coalitions. It's just a matter of placing one's bribes (or bets if you prefer) in the correct places.

Italy, unlike the other PIIGS except perhaps Spain, can produce everything that is necessary to feed, clothe, and move itself except perhaps some fuel that can be traded for a few Ferraris. They don't need the Germans.

That was a funny joke "except some fuel perhaps". The major part of italy's electricity production is from oil. Most of transportation infrastructure run on oil. Italy doesn't have a chemical industry anymore. And what about gas? Contrary to what you might think, although we have a long warm summer we also have a real cold winter. Also modern agriculture is based on artificial fertilizers which are made mainly using natural gas. Only that delusional of Mussolini could think of makin Italy self-sufficient, and it didn't really work (and it was 70 years ago, quite a different world...). If Italy would go back to Lira the cost of buying oil and raw materials on the market will produce hyper-inflation in a few months

The banksters lawyers are clever indeed with their wording. If this happens, the banks win. If that happens, the banks win. Thanks for paying your fee to us for CDS "insurance" when we've rigged the game. Love those pocket lining products. Bankers are gonna need to go back to the 3-piece so they have extra pockets in the vests as the raids pick up.

New porn fiat coming; bring back the lions in the Collesium; cover the politicians with sheeple blood before tossing them in the ring; would be greatest PPV event in history; here's my $239.00 (plus tax).

Given that many in the various EU countries used and remember their old school money, it seems it would be psychologically easier to revert than it would be to say, change one day out of the US dollar into something different for Americans. Is that correct and would it mean that if one country starts printing and circulating their own again, all the various printing presses would hum along after the first domino fell?

The leak about Berlusconi started long before the bond sqeeze. FT article suggesting berlusconi running to Putin bday says it all. He is perceived as too close. Wikileaks, Bunga bunga /tax scandel (Ozawa like), Italy opposition to Libya (call for halt) and Nabucco vs. Sud Stream etc (Eni). Berlusconi is a liability as Putin comes back into power in 2012 (berlsuconi ends term 2013). lay out the timeline. Hard to miss this with all that is happening in MENA & Missile Defense (NATO/Russia) & Vatican

A large wealth tax–and some have spoken of sums larger than €200 billion–could knock Italy’s public debt ratio down to 80% of GDP leaving total-economy debt where it is now, putting the country’s metrics on the level with some triple-A countries.

From CS study

Italy choose to leave Italy has a large number of advantages over the rest of the periphery: Italy runs a primary budget surplus (thus it would need to tighten less), net foreign liabilties are small (thus preventing a massive default of the private sector), borrowing from ECB is only 5% of GDP, the country is a net contributor to the EU budget and it has a big industrial base thus benefiting more from a cheaper currency).Clearly the cost of srvicing the public debt (120% of GDP) would soar (assuming the BTP/bund spread rise to the pre-EMU level of 6%, Italy's interest costs would be c 8% of GDP cf 4.8% now, thus taking c 1.5% off GDP growth; however, with an average maturity of 7.2 years and only 20% of debt coming due within the next year, higher funding costs would only come trough with a lag).The cost/benefit of Italy leaving the Euro looks a lot less clear-cut than the rest of the periphery.the problem in our view is that if a big exporter like Italy left the Euro, that would put the rest of peripheral Europe under huge deflationary pressure (to try and stop foreign capital and export market share going to Italy)and it is very hard to see how other members of the periphery would not join Italy.

Italy’s total economic debt is not high by euro-zone standards, and roughly the same as Germany’s. But that’s because private debt levels are low–and wealth levels high–while the state is hobbled with €1.8 trillion in debt

Yet Italian households have financial assets worth an estimated 180% of GDP and unmortgaged real estate worth more than 300% of GDP, and yields on these assets are far lower, posing a net drag on the economy as a whole. That’s extremely inefficient given that senior bankers are warning loudly of an imminent credit crunch given they can’t make profitable loans given their funding costs are rising with Italy’s sovereign yield.

Households’ net wealth, i.e. the sum of real financial assets (property, businesses and valuables) and financial assets (deposits, government securities, shares, etc.) net of financial liabilities (mortgage loans and other debts), has a median value of €153,000 in 2008. In real terms, after growing by about 44 per cent between 1993 and 2006 thanks mainly to the rise in the value of real estate, the median diminished by about 1 per cent in 2006-08